December 9, 2022

Philip Schiff: Stocks Are Priced for Perfection in an Imperfect World

Investors are moving out of hype and momentum into real value, into real dividends. Why is that happening?

Despite all sorts of economic bad news, since Friday, the Dow Jones was on pace to get the best October in history.

As Peter Schiff explained in his podcast, this demonstrates the fact that for the moment, bad news is good news, and stocks are costed for perfection in an imperfect world.

In the last month, we saw  more air come out of the housing bubble ,   PMI dip deeper into contraction , along with other signs of a deteriorating economic climate. Even the positive growth GROSS DOMESTIC PRODUCT print  wasn’t great news . But the markets shrugged it all off. Since Friday, Oct. 28, the Dow was up fourteen. 4% on the month.

Peter called this particular a bear market modification.

He also noted that the rotation through growth to value shares continued. This is evidenced by losses in the NASDAQ.

“ Traders are moving out of buzz and momentum into genuine value, into real payouts. And why is that occurring? That is because interest rates possess moved up, and so, jooxie is no longer pricing stocks depending on a fantasy. Plus, we have now a cost of capital. It comes with an interest rate with which to low cost future earnings. ”

Peter said he considers we’re just at the beginning of this rotation. In fact , it could final the rest of this decade. Which means the indices heavy with momentum-oriented stocks have a long way to decline.

To show just how elevated marketplaces are, Peter went back to 1995 and found the average price-to-earnings (before taxes) was 14. 1 . The current ratio is 19. 6.

“ Therefore , in order for the market to return towards the normal ratio, we need another 28% decline from here. Not from the highs, but through where we are right now. ”

The particular price-to-sales ratio also indicates an overvalued market.

Peter said the only way you can justify a market this particular expensive is if interest rates return down.

“ The only reason we had such high multiples, be it price to earnings or price to sales — it was all a perform of 0% interest rates. Properly, we don’t have 0% interest rates anymore. ”

If interest rates remain where they are, or still move higher, which the Fed is promising, the markets possess a long way to fall to get back to normal.

“ But there is absolutely no reason why the markets should be costing a normal valuation given the adverse circumstances that are right now taking place. We have the highest inflation in 40 years, maybe the highest inflation ever. The Fed has a monumental task before it if it’s actually going to deliver on its promise to bring inflation down to 2%. So , if you believe the Fed – that they’re just as resolute in their dedication to bring inflation back down in order to 2%, and they’re going to do whatever it takes to achieve the goal, then you definitely have to concede that the market is not going to fall to normal value, but a below regular valuation. ”

Think about it. At times given that 1995, these metrics have already been lower than average. Why? Because during those times the markets were facing adverse situations.

“ Well, I can’t think of more adverse circumstances than the types that the markets are operating under right now. ”

So , we should see a market getting cheaper compared to those historical uses.

“ But not only is the marketplace not cheap, not only is it not averagely or fairly valued, however it is still extremely expensive. Therefore , we have a market priced just for perfection and we have anything but perfection in the current circumstances. ”

Philip said this tells your pet investors still don’t believe the Fed. Or they believe that the Fed will be able to rapidly bring inflation back down in order to 2%, and then it will be capable to return rates back to artificially low levels.

“ Because with no 0% interest rates and QE, there is no way to justify the current value of today’s market. When investors believe that, they are incorrect. ”

Peter said the Given isn’t going to get pumpiing anywhere near 2%. And even if the Fed did have the ability to pull that off, this wouldn’t be able to return to abnormally low interest rates without inflation quickly spiking again.

“ Neither of those outcomes is possible. The only way the marketplace could be correct in attributing these high valuations in order to today’s market is is if I’m right about what occurs – that the Fed rotates and gives up the fight against pumpiing even though inflation never earnings to 2%. ”

Peter recently said it looks like  the Fed has already made a “ soft” pivot .

He said even beneath the environment he envisions, price-to-earnings ratios will still come down.

“ The only way to justify the existing level is if the Given is able to return to those artificially low interest rates and QE,   and   inflation goes back down to 2% and stays there. Yet as I said, that is impossible. So , there is no actual way that one could justify the current valuation of the US market. So , the particular valuation have to come down. ”

With this podcast, Peter also talked about Amazon, Apple and Netflix’s disappointing earnings reports, Meta and Alphabet’s pain because advertising money dries up, the need for consumers to save no and buy later, and Elon Musk’s Twitter purchase.


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